The European Commission has adopted a package of draft legislation to significantly strengthen the supervision of the financial sector in Europe. The aim of these enhanced cooperative arrangements is to sustainably reinforce financial stability throughout the EU; to ensure that the same basic technical rules are applied and enforced consistently; to identify risks in the system at an early stage; and to be able to act together far more effectively in emergency situations and in resolving disagreements among supervisors. The legislation will create a new European Systemic Risk Board (ESRB) to detect risks to the financial system as a whole with a critical function to issue early risk warnings to be rapidly acted on. It will also set up a European System of Financial Supervisors (ESFS), composed of national supervisors and three new European Supervisory Authorities for the banking, securities and insurance and occupational pensions sectors.
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1. Why do we need a European Systemic Risk Board (ESRB)?
The Commission believes Europe needs a European Union-wide system to be able to assess and prevent potential risks to financial stability in the EU properly and swiftly. The rapid propagation of the financial crisis from the US to Europe in 2007/2008 highlighted the present weaknesses in monitoring and assessing potential threats and risks arising from the interaction between macro-economic developments and the financial system in the EU but also worldwide. This is why the Commission proposes the creation of the ESRB and its close cooperation with the Financial Stability Board and the International Monetary Fund whose powers in terms of international financial stability and economic surveillance are also being reinforced.
2. What kind of risks will the ESRB monitor?
The notion of systemic risk is wide. The ESRB will have to monitor the soundness of the whole financial system. This can cover very different areas, from the financial situation of the banks to the potential existence of asset bubbles or the good functioning of the market infrastructures. The ESRB will have to identify all the potential risks and, as the intention is not to end up with an endless list, it will also have to prioritise them and issue warnings when it thinks that the risks are significant.
3. How will the ESRB deal with the risks it will identify?
If the ESRB identifies risks to stability it shall issue recommendations to the country or group of countries concerned. If the addressee agrees with the recommendation, it must communicate the actions undertaken to deal with the potential problem. If it does not agree and chooses not to act, the reasons for that must also be properly explained. If the ESRB feels that the explanations are not convincing, it shall inform the Council of ministers.
In general, the ESRB recommendations will also be sent to the Council. In some cases, the Council itself will be the addressee. It is notably the case of the warnings or recommendations addressed to the Community as a whole. But in most cases, the warnings and recommendations will be transmitted to the relevant addressee and to the Council. This transmission of warnings and recommendations is not intended as a filter or as a way to water down their content, but aims on the contrary at increasing the moral pressure on the recipient to act or explain.
The quality of the ESRB work will provide a significant moral incentive to follow up on its recommendations or give convincing reasons for not to.
Specific follow-up procedures are also foreseen. For instance, when a national supervisory authority intends to deviate from an ESRB recommendation, it must first discuss and justify it with the competent European authority and will have to take into account its views before answering the ESRB. And if the ESRB feels that the explanations are not convincing, it shall inform the Council.
4. Why is it proposed to give central banks, including the European Central Bank, a prominent role within the ESRB?
Central banks have always played a key role in macro-prudential supervision and in many countries they are responsible fully or in part for the supervision of individual institutions. .The European System of Central Banks (ESCB) includes all 27 national Central Banks of the European Union and the 27 Governors sit in the General Council of the ECB. Being at the heart of the EU monetary system and having wide ranging expertise in the macro-prudential field, the ESCB holds a unique and privileged position for analysing and assessing the linkages between developments in the financial sector and the macroeconomic performance of EU economies. It is therefore appropriate for the ESCB to have a prominent role in the European Systemic Risk Board.
5. The Secretariat of the ESRB will be entrusted to the ECB. Does this mean that non euro area Central Banks will be excluded from the preparation of the ESRB work?
No, the ESRB will include the central bank governors of all 27 Member States. The ECB employs at all levels of its hierarchy citizens of all Member States, including from those who have not adopted the euro. Seconded experts from non euro area Central Banks will participate within the ECB to the work of the ESRB secretariat.
6. Will the warnings and recommendations be made public and if not why?
The issues potentially addressed in the warnings and recommendations will be extremely sensitive and we must be careful about adverse effects, such as the warnings turning into self-fulfilling prophecies by frightening financial markets. The decision whether or not to publish will, therefore, require a case-by-case decision after a careful assessment of the potential consequences.
7. What form do the legislative texts take and when do you expect them to be approved?
The creation of macro-prudential supervision at the EU level and the establishment of the ESRB are foreseen in a draft Regulation based on Article 95 of the EC Treaty, that requires co-decision by the Council and the European Parliament. The Regulation is completed by a draft Council Decision which confers on the ECB the task of ensuring the Secretariat of the ESRB.
Before making the legislative proposals, the Commission conducted extensive consultation of interested parties both after the publication of the report of the Larosière Group and of the May 2009 Communication, which outlined the new supervisory architecture. The June European Council supported the proposals contained in the Communication and welcomed the Commission’s intention to adopt the legislative texts early in the autumn for a swift approval in order for the new framework to be in place in the course of 2010. The European Council has announced it would discuss the subject again in October.
8. The latest crisis has shown that systemic risks can be global in nature. Why not leave monitoring of systemic risks to the recently enhanced and renamed Financial Stability Board?
The existence of an internal market in the EU and the increasing political and financial integration of the EU require an EU-level institution to supervise and monitor risks to the financial system. The US has also announced a systemic risk monitoring body, to be created within the Federal Reserve. The ESRB will, of course, liaise closely with the new Financial Stability Board and with the other relevant international bodies, contributing to a stronger global framework for risk monitoring and more stable financial markets. This global network ought to monitor systemic risks more effectively and detect potential crises earlier to be able to defuse them or, in the very least, mitigate their impact. The ESRB will play a key role in this network and fills an important gap in financial supervision in the EU.
9. Will the ESRB lead to a greater administrative burden for financial institutions?
No. Most data needed by the ESRB will be provided to it by the European Supervisory Authorities (ESAs) using information which they already possess. Before asking for information, the ESRB will furthermore check with the ESAs that its request is proportionate.
The ESRB will also not present any extra cost for the Community budget as it will build, to the extent possible, on existing staff and resources of the European System of Central Banks, with a secretariat provided by the ECB
10. The ESRB will potentially deal with very sensitive market information. How will the confidentiality of the data be safeguarded?
There are specific articles in the Regulation and the Decision aimed at guaranteeing effective procedures for handling confidential data. Specific detailed procedures for the transmission of the information will furthermore be agreed between the ESRB and the European Supervisory Authorities. Last but not least, one should keep in mind that all the Members of the ESRB are used to dealing with highly confidential data on a daily basis.
11. Who will be the chair of the ESRB?
The chair will be elected by the members of the General Board, the main decision-making body of the ESRB, for a period of 5 years, renewable. The General Board will be composed of all the Governors of the national Central Banks in the EU, the President and the Vice-President of the ECB, a Member of the European Commission and the Chairpersons of the three European Supervisory Authorities. National supervisors and the President of the Economic and Financial Committee will also form part of the Board, but without voting rights.
12. Why will national supervisors have no voting right in the General Board?
The presence of the national supervisors inside the ESRB improves the flow of information and allows a constant exchange of views between the actors having a macro angle (the ECB, the National Central Banks, the Commission ) and those working with a micro-prudential perspective. But national supervisors are in charge of micro-supervision of individual banks, and not of the stability of the financial system as a whole. This difference in the approach, mission and analytical angle explains the difference in the voting rights.
13. The ESRB will have over 60 institutions represented in it. Is this not too cumbersome to be effective?
A broad representation of institutions within the ESRB is necessary to ensure a global macro-prudential perspective in the ESRB’s risk assessments. The ESRB must include all those who have relevant information and expertise to contribute. These include the governors of national central banks, the new European Supervisory Authorities, and national supervisors. However, a steering committee (consisting of the ESRB chairperson and vice-chairperson, five additional central bank members of the ESRB, the chairpersons of the new European Supervisory Authorities, the President of the EFC and the Commission member) will prepare and ensure efficient ESRB operations.
14. What will be the role of the Advisory Technical Committee (ATC)?
The composition of the ESRB will be very high level (Governors, Commissioner, Chairman of the European Authorities etc). While the secretariat will be able in most cases to prepare all the discussions and provide the necessary analysis, it can happen that the ESRB needs to draw on more specific competences than the ones usually available at the ECB. The ATC will be able to bring this technical expertise on issues for which it might be needed to go beyond the support provided by the secretariat (e.g., problems linked to the supervision of the insurance sector ).
Financial Services Supervision and Committee Architecture
Source: European Commission
